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Fossil Industry Sees Financial Value Collapse as Prices Stay Low, Renewables Surge

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Despite record production and rapidly-rising greenhouse gas emissions, North American oil and gas companies are coming off a notably bad financial year in 2019, and analysts are predicting they won’t be any happier about their financial results in 2020.

The Institute for Energy Economics and Financial Analysis was out last week with a month-by-month recap [1] of the industry’s year, citing its own earlier report that the fossil energy sector finished dead last [2] in the Standard & Poor’s stock index. “Was 2019 the year the music died?” IEEFA asked in its lead-in to the report.

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“The industry continued to collapse in value, relative to the broader stock market,” writes financial analyst Kathy Hipple. “Throughout the year, oil and gas markets remained over-supplied. Oil prices began the year at US$55 per barrel and ended the year 24% higher, at $68.” But “the oil price increases were not enough to lift investor interest, and persistent low prices for natural gas continued as rising supply outpaced rising demand.”

A week earlier, IEEFA reported [4] that fossils have been living beyond their means since 2010, failing to make enough money from sales of oil, gas, refined products, and petrochemicals to cover their payments to shareholders. The net result: A 50% increase in fossil bankruptcies last year in Canada and the United States, and declining investor confidence in the wider industry.

Last week, Dallas law firm Haynes and Boone reported 42 fossil bankruptcies last year in North America’s two northernmost countries, up from 28 in 2018. A total of 208 oil and gas companies have packed it in since 2015, Thomson Reuters reports [5], in a post republished by CBC News.

“This increase in year-over-year filings indicates that the reverberations of the 2015 oil price crash will continue to be felt in the industry through at least the first half of 2020,” the report stated.

In fact, “I think the trend line should be moving up in the first half of 2020,” said Haynes and Boone partner Buddy Clark. With the United States alone producing enough oil and gas to influence global prices, “you can bomb a major oil facility in Saudi Arabia or kill an Iranian general or shut in all Libyan oil production and prices don’t move.”

Those trends had the majority of respondents to an industry survey by DNV GL betting against any approvals for new, capital-intensive fossil projects this year, while more than 70% of oil and gas execs foresaw increasing investment in low-carbon energy, Reuters writes [6], in a story picked up by the Financial Post. [Then again, with just 0.8% [7] of their capital expenditures last year going to renewable energy and carbon capture technologies, they have nowhere to go but up.—Ed.]

“The survey showed a dip in optimism over the sector’s overall growth prospects this year, with two-thirds of participants confident of growth, down from 76% last year,” Reuters states. “Nearly half of respondents said their companies would still achieve acceptable profits if the oil price were to average less than $50 a barrel,” the news agency adds, citing the DNV survey. But “many respondents expect low oil and gas prices to prevail, while the cost of renewables is expected to continue falling over the next 30 years, making those energy sources increasingly competitive.”

Recent news reports paint a similar picture for a liquefied natural gas industry that was previously expected to surge. Analysts at IHS Markit looked back on 2019 as a banner year for LNG, with the industry setting records for new investment, new liquefaction start-ups, and imports to China and Europe, reports [8] industry newsletter Rigzone.

“The ongoing pace of new investment is especially noteworthy considering a market context of weak global prices,” said Michael Stoppard, the company’s chief strategist for global gas. “Not only did LNG grow at an unprecedented rate in 2019, but the industry also laid the foundations for continued strong growth into the middle of the decade.”

But other analysts saw that new production—along with warmer winter temperatures—undercutting the industry by driving LNG prices even lower.

“The global oversupply of LNG has been building and building and building,” said [9] Ron Ozer, founder of Statar Capital LLC, a New York hedge fund focused on gas. “The gas market can’t stomach the oversupply and warm weather, and it’s getting both.”

“The start-up of new export projects from Australia to the U.S. has flooded the market, while brimming stockpiles in Europe and an expected slowdown in Chinese demand have dumped cold water on consumption prospects,” Bloomberg explains. “[The price of] LNG for spot delivery to North Asia is on track to hit an all-time low this summer, while gas prices in Europe and the U.S. are trading at the weakest seasonal levels since 1999.”

Bloomberg cites Wood Mackenzie analyst Robert Sims expressing concern about low prices and shaky business margins, while investment bankers Morgan Stanley see weak prices “challenging new projects seeking final investment decisions”. OilPrice.com also revealed [10] last month that the shale fields in the Permian Basin in Texas and New Mexico are shattering records for the gas they simply burn off by flaring after they’ve taken it out of the ground.

And fossils’ prospects aren’t expected to improve anytime soon. The U.S. Energy Information Agency projects [11] that most of the country’s new electricity production this year will come from solar and wind, while generation from gas plants grows by just 1.3%, its slowest rate since 2017.

“The EIA’s Short-Term Energy Outlook forecasts that generation from non-hydropower renewable energy sources, such as solar and wind, will grow by 15% in 2020—the fastest rate in four years,” writes [12] Diesel & Gas Turbine Worldwide. “Forecast generation from coal-fired power plants declines by 13% in 2020.”

By contrast, “EIA expects the U.S. electric power sector will add 19.3 gigawatts of new utility-scale solar capacity in 2019 and 2020, a 65% increase from 2018 capacity levels. EIA expects a 32% increase of new wind capacity—or nearly 30 GW—to be installed in 2019 and 2020. Much of this new renewables capacity comes online at the end of the year, which affects generation trends in the following year.”

Utility Dive puts [13] the two-year total for new wind and solar capacity at 61 GW in 2020 and 2021.

But while the overall picture counts as a slowdown from a fossil industry standpoint, the numbers don’t match up with the carbon reductions the United States will have to achieve over the next decade.

“During the past decade, the electric power sector has been retiring coal-fired generation plants while adding more natural gas generating capacity,” the industry publication explains. “In 2019, EIA estimates that 12.7 GW of coal-fired capacity in the U.S. was retired, equivalent to 5% of the total existing coal-fired capacity at the beginning of the year. An additional 5.8 GW of U.S. coal capacity is scheduled to retire in 2020, contributing to a forecast 13% decline in coal-fired generation this year. In contrast, EIA estimates that the electric power sector has added or plans to add 11.4 GW of capacity at natural gas combined-cycle power plants in 2019 and 2020.”